A ‘corona bond’ would demonstrate that European solidarity exists

Friday, 27 March 2020

Borders closed. Shops shuttered. Citizens locked down. In Brussels and across Europe the new coronavirus (Covid-19) crisis has disrupted life in unprecedented ways.

“We are at war,” according to France’s president, Emmanuel Macron. In some respects, indeed, the restrictions today are more extreme: most shops, bars and restaurants remained open during the Second World War.

There is huge uncertainty about how the crisis may play out. How long will the pandemic last? How many people are likely to die? When might a vaccine or cure be developed? As well as those medical unknowns, there are also economic, financial and political uncertainties. How destructive might the economic impact be? How bad might the resulting financial crisis get? And what might the political consequences be? Like a major war, the deadliest epidemic since the influenza pandemic of 1918 is likely to have lasting effects.

The coronavirus crisis is not just a medical emergency. It is also an economic one. The eurozone economy is contracting faster than it did after the collapse of Lehman Brothers in September 2008. Production across vast swathes of the economy has been shut down: factories are closed, aeroplanes grounded, entertainment venues boarded up.

Businesses big and small suddenly have little or no revenues. While many office workers can work from home, those who toil in factories and provide face-to-face services cannot. Spending is curtailed too, since people can scarcely go out.

That short-term disruption to both supply and demand is severe enough to cause a very sharp recession. On top of that, there is crippling uncertainty. Consumers are hardly likely to make big spending commitments when they don’t know how bad things may get. Businesses focused on trying to survive the immediate crisis are scarcely going to gamble on longer-term investments.

The crisis is derailing governments’ plans too. Economic reforms are being shelved, infrastructure projects postponed. Given that so much that could go wrong in the coming weeks and months, the European Green Deal to combat climate change in the coming decades – the signature project of European Commission President Ursula von der Leyen – is no longer an immediate priority for policymakers.

The hope is that once the pandemic passes the economy will bounce back. To some extent, it inevitably will. But the big danger is that unless many businesses and workers are provided with economic life support, the disruption to production and spending could cause even greater suffering – and a much longer and deeper depression.

Sound businesses – such as usually busy restaurants that cannot afford to pay the rent while closed – are likely to go bust, hitting their suppliers and creditors too. Unemployment is likely to soar as cash-crunched companies let go of surplus workers. Jobless workers would, in turn, slash their spending. All of that could cause a downward spiral that could also drag down still-weak and fragile banks – and the governments that, in effect, still backstop them.

That’s why – rightly – European governments are taking exceptional measures to support workers’ incomes and keep businesses afloat. Among other things, they are paying employees’ wages, deferring freelancers’ tax bills and extending sick-leave provisions. And they are also providing and guaranteeing loans to struggling small businesses and injecting capital into big companies such as airlines by buying shares in them.

In effect, governments are acting as insurers of last resort and covering part of businesses’ and individuals’ pandemic losses.

The figures are huge. Even the German government, which prides itself on its fiscal prudence, is planning a €750 billion package to support businesses and workers through the coronavirus crisis. Much more may be needed.

Wisely, EU state-aid rules are being relaxed, so governments can support stricken businesses. The strictures of the eurozone’s fiscal rules – the Stability and Growth Pact – have also been suspended, so governments are allowed to borrow freely – for now. And most can afford to do so, because they can borrow at near-zero or even negative interest rates.

Indeed, markets are, in effect, urging governments to borrow more. Amid the economic turmoil, investors have dumped shares and sought refuge in the safety of government bonds, lowering governments’ borrowing costs. The European Central Bank (ECB) has pushed interest rates down further by pledging to buy €750 billion of government and corporate bonds this year through its new Pandemic Emergency Purchase Programme (PEPP), in addition to its existing quantitative easing (QE) purchases.

The launch of the PEPP helped quell an incipient financial crisis sparked by the ECB’s new president, Christine Lagarde. In a huge gaffe, she had declared that “we are not here to close spreads” – the additional interest that riskier government borrowers such as Italy must pay compared to Germany, which is deemed the safest. Her remarks had led Italy’s borrowing costs in particular to soar, at a time when its government needed full fiscal flexibility to confront the brunt of the coronavirus crisis.

In effect, Lagarde undermined her predecessor Mario Draghi’s 2012 pledge to do “whatever it takes” to hold the euro together, which was decisive in stopping the panic. While the PEPP papers over the cracks for now, the risks of a return of the eurozone crisis have risen.

Remember that the 2010–12 panic almost destroyed the euro. Eventually, the ECB, with the acquiescence of German Chancellor Angela Merkel, stepped in to ensure its survival. But Merkel and other eurozone leaders have since failed to fix the fundamental flaws of the monetary union. The fates of weak banks and weak governments remain tied together. In difficult times, the euro acts as a divergence machine that punishes the weak and reinforces the strong. And the eurozone still lacks a jointly issued asset that would provide an anchor of stability.

That urgently needs to change, as nine European governments led by France have demanded. But Germany, the Netherlands and others are hugely wary of collective eurozone borrowing, which they see as a slippery slope towards subsidising profligate southern European governments.

Yet a pandemic that threatens all of Europe is surely a compelling reason for an exceptional common fiscal initiative. If not now, when? While northern Europeans wrongly blamed the 2010–12 crisis on southern Europeans, they can scarcely blame Italy or Spain for the coronavirus pandemic. And both medically and economically, eurozone countries’ fates are intertwined.

A “corona bond” would provide a huge boost for the eurozone. It would enable a massive, collective response to a shared economic crisis, help avert the threat of a financial crisis and avoid the likely pressure for crushing austerity after the crisis has passed. Corona bonds could be bought by the ECB, enabling the tight coordination between monetary and fiscal policy that exists in countries outside the eurozone, such as Sweden, Japan, the UK and the US, and is necessary in deflationary crisis times.

More broadly, a corona bond would provide a safe asset for European and international investors, give the eurozone greater geopolitical reach and provide greater protection against President Donald Trump’s abuse of the dominance of the US dollar for harmful political ends.

Crucially, a corona bond would also demonstrate to Italy in particular that European solidarity exists. Many have rightly argued that the pandemic underscores the need for greater international cooperation, both within the EU and beyond. It is a truly international crisis; the virus does not respect national borders.

But in practice, European governments have behaved recently as if each country must fend for itself. Even within the Schengen area of supposedly border-free travel, governments were quick to close national borders. The EU is meant to have a single market, yet France and Germany banned the export of protective face masks and other medical supplies. Shockingly, when Italy, the country worst hit by the coronavirus, begged for urgent assistance, none of the other 26 EU governments responded – until China eventually did.

Such actions are a political gift to nativist nationalists who view closing borders as the solution to every ill. The lesson that many people are likely to draw from this crisis is that nation states ultimately come first.

Fine words about European solidarity are empty if Europeans don’t stand together in a medical emergency. The likes of Matteo Salvini and Marine Le Pen are rightly rebuked for their narrow-minded nationalism. But if those who claim to believe in the EU behave like nationalists in a crisis like this, they are not just hypocritical, they are doing the nationalists’ work for them.